Q. In 1969 I purchased a $5,000 “Matured Endowment Life Insurance Policy” with proceeds to be paid either upon my death to my beneficiary or to myself if I reached age 65. I reached age 65 last year and received the policy proceeds, which had accumulated to approximately $8,000. My taxable gain was calculated to be about $4,000. The insurance company withheld 10 percent of my taxable gain for federal taxes. How does this get reported? Also, I understand that tax laws related to matured endowment life insurance policies were changed in the 1980s to make them less favorable. I’m not sure if 10 percent is all that needed to be paid because I purchased before 1980, or whether I would be taxed on these gains according to my current tax bracket. And will I also owe state taxes?
– Made it to 65
A. Happy belated birthday.
You are correct about major changes to the tax treatment of these types of policies in the 1980s, said Michael Steiner, a certified financial planner and certified public accountant with RegentAtlantic Capital in Morristown.
Steiner said there were two major changes – one in 1984 and one in 1988 – but they won’t matter to you.
“Because you entered into your contract in 1969, your policy was grandfathered and not subject to the updated rules,” he said. “As a result, you are correct in that the amount that is subject to tax is the difference between your premiums paid and the value you received when your contract endowed.”
Steiner said the gain is treated as ordinary income, not as a capital gain, so you cannot offset losses from the sale of stocks, bonds or mutual funds against this income.
The insurance company should have sent you a 1099 with the filing information for your taxes, said Douglas Duerr, a certified financial planner and certified public accountant with U.S. Financial Advisors in Montville. The form would show the amount that’s taxable and it would list any taxes that were withheld.
“Generally 10 percent is withheld for federal taxes on this type of distribution if no other amount is given by the owner,” he said. “If no additional instructions come from the owner, they will generally not hold any state taxes. This does not mean it is not taxable in your state but that no taxes were withheld.”
Duerr said the key to determining the tax implications is having the 1099 documentation from the insurance carrier. If you do not have it or if you misplaced it, call the company and request a duplicate copy.
—Karin Price Mueller
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